It's evident Japan's leadership is set on shaking things up, but what that means for Japan's stock markets remains unclear.
Markets generally don't react well to upheaval or surprises—and with Japan's new leadership at the helm, anything's possible.
Caution should prevail when it comes to investing in Japanese equities—but that doesn't mean Japan's potential woes will hold back global stocks.
Since the Democratic Party of Japan (DPJ) assumed power August 30th—unseating the long-ruling Liberal Democratic Party—Japan (the world's second largest economy) has been on a bit of a rollercoaster. In recent weeks, Prime Minister Hatoyama and the DPJ's campaign promises for change are ringing true—and that's not necessarily a good thing for the country's stock market.
This week, Japan's Cabinet Office revised last quarter's GDP number to 1.3% annual growth—down from the 4.8% figure announced mid-November. The largest adjustment came in business investment—initially announced as +1.6% for the quarter, the new figure showed a 2.8% decline. Additionally, the government indicated plans to alter future GDP components and calculation methods, ostensibly to prevent such a drastic revision in the future. While market impact of such action is likely limited, arbitrarily modifying standardized economic growth measures doesn't engender much confidence in Japanese economic statistics going forward.
In another surprising development, government officials announced last week they are abandoning plans to privatize the nation's postal service, passing a law to block the previous prime minister's multi-year plan to deregulate Japan Post operations. This intervention indicates the DPJ is as committed as advertised to reversing some of its predecessors' pro-business initiatives.
On the policy front, even as other major central banks begin structuring exit plans from their monetary stimulus strategies, the Bank of Japan unveiled a new measure to lend even more (10 trillion yen in 3-month bonds at a 0.1% fixed rate). The Japanese government also introduced a new stimulus plan (the first of this administration) in the face of growing demands for increased public assistance. While the goal of encouraging economic recovery is worthy, the methods are a bit suspect. Japanese banks are already awash in liquidity. It's likely the government is more concerned about stifling the yen's recent rise to encourage exports—a fairly mercantilist maneuver. Will the additional stimulus funds spur employment as the Prime Minister hopes? Hard to say—stimulus dollars take notoriously long to disburse and even longer to take effect.
It's evident Japan's leadership is set on shaking things up, but (as we said in August just before the election) what that means for Japan's stock markets remains unclear. If the last month is any indication, volatility is in the cards: Japan's primary market-cap weighted equity index—the Nikkei 225—fell over 3% the last Friday of November, then rose over 7% during the first week of December, only to fall back 1.42% on Thursday.*
We know markets generally don't react well to upheaval or surprises—and with Japan's new leadership at the helm, anything's possible. Caution should prevail when it comes to investing in Japanese equities—but that doesn't mean Japan's potential woes will hold back global stocks. Global stocks proved during the entirety of the 1990s they can rise even as Japan struggles.